Stephanie Hughes, finance reporter for Financial Post, explains why the loonie has been languishing despite the boom in commodities prices. To view the video, visit the Financial Post website. Or you can read the transcript below. 

“The loonie’s disconnect from oil prices meant that our currency has languished while energy prices surged. So what’s happening to the loonie and why isn’t it taking flight? Let’s dig into the details.

Over the past year the loonie has seen some volatile trading while edging lower. The decline came even though West Texas intermediate surged to its highest price since the last oil boom. To put it into more perspective the loonie has barely glanced at $0.80 against the U.S. dollar this year though oil prices have surged well above the $100 US. The Canadian dollar and oil prices parting ways in recent years has been shaking the loonie’s reputation as a petro currency. 

So what’s going on here? Two words – Central banks. The U.S. Federal Reserve’s aggressive rate hikes and hawkish tone as well as investment funds flowing to the U.S. dollar as a save haven have give the greenback much more lift. These forces working in tandem have the U.S. dollar outpacing other world currencies. 

In an interview with the Financial Post, Bank of Canada Governor, Tiff Macklem noted that the loonie is still strong compared to other countries currencies but has largely lagged behind its southern counterpart. This is making the loonie appear weaker than it is. Macklem also said that the loonie has become unhinged from oil prices for two reasons. There’s been a shift in the longer-term outlook for Canadian Oil exports and more hawkish expectations from U.S. monetary policy. We’ve already seen the Federal Reserve deliver another super sized 75 basis point rate hike in July, making those expectations a reality. 

On the loonie’s relationship with oil, Macklem said ‘we are not getting the historical investment boom in oil and gas that we’ve had when oil prices go up sharply like they have. You’re not seeing a big investment boom; so you’re not seeing a big influx of foreign investment; you’re not seeing much of an increase in demand for Canadian dollars, and so you’re not seeing as much of a boost of the Canadian dollar.’

The weaker Canadian dollar is also complicating the Bank of Canada’s fight against inflation and could force the central bank’s hand in delivering higher interest rate hikes. These comments followed shortly after the bank delivered a surprise full percentage hike on July 13th to stamp out inflation. 

Currency analysts are also beginning to see a reverse currency war among central banks to strengthen their currencies and fight inflation. Unlike a regular currency war where countries weaken their currency to boost economic growth, a reverse currency war bolts up a nation’s currency to make imports relatively cheaper. The Fed has been actively strengthening the greenback through its hawkish policy. There’s still some debate on how effective a reverse currency strategy will be in taming inflation.

The loonie’s struggle to get lift against the U.S. dollar is a far cry from last year when it was flying at a six year high at $0.83 against the greenback. Macklem said the fact that Canada hasn’t seen as much appreciation in the Canadian dollar, means the central bank will have to do more through higher interest rates to bring inflation to heal.”

Source: Financial Post